That’s the sound of glass shards from the broken window hitting the mud. Much has been written on Cash for Clunkers so I do not want to reprise all of it here. I just wanted to close the year with a reminder to readers about the message behind the title of this website.

The latest report from the Cash for Clunkers program indicates that 677,875 Clunkers vouchers were cashed in. What this means is that there were nearly 700,000 cars destroyed (that were less than 25 years old and getting less than 18 mpg) for the sake of “exchanging” them for nearly 700,000 newer and more fuel efficient cars. Now, I don’t want to analyze whether this program was actually stimulating or not (it seems to have simply moved up the purchase of cars and done nothing to the overall level of car buying, or jobs in the auto sector), I just want to remind readers of two pieces of information that are never reported on by the official “CARS” czars.

First, as Bastiat reminds us time and time again, destruction is not “good” for the economy. Let’s suppose you want to totally ignore the tax implications of the CARS program for now. Remember, the CARS program cost taxpayers $2.85 billion dollars. So let’s assume that number is worth spending, and it generates no economic problems to collect or administer. If the goal is to get 700,000 new cars out of the hands of dealers and into the hands of consumers, which would seem to be “better” for the economy?

Getting 700,000 new cars into the hands of people while destroying 700,000 existing cars. There is thus no net change in the number of cars on the road (in fact I can argue it will be less) and therefore little change in consumers’ overall ability to get from Point A to Point Q (they may be more comfortable in their new cars however).

Getting 700,000 new cars into the hands of people while NOT destroying another 700,000 existing cars. There would therefore be 700,000 more cars on the road and a much larger increase in consumer well-being from the program.

It would seem to reasonable people that the second option is more desirable (again, assuming that the 700,000 new cars are a total free lunch that are not paid for by taxes, which they are not). On what sort of a bizarre assumption would you be led to believe that destroying older cars and seizing their engines be a good idea? Clearly those cars had some value. The point is, that even ignoring the tax “free-lunch” I am assuming, if you are going to talk about the success and economic benefits of the Clunkers program you have to subtract the value of how much stuff you destroyed.

And how much value did we destroy? I do not have the data – but clearly people were turning in cars that were valuable. The Clunkers vouchers averaged $4,204 per transaction. So it is entirely plausible that consumers would be willing to trade in cars that are worth up to $4204 in order to get this benefit. For the sake of argument, let’s assume that the cars turned in were only half as valuable, or on average worth $2,102 and that none of that value is extracted after the cars are junked (this is not true of course, I am sure the metal was recycled for scrap – but I also believe than my estimate for the average value of the turned in cars is low). In other words, the Clunkers program deliberately destroyed 677,875 x $2,102 = $1.4 billion of value. Therefore estimates of the “stimulating” effect of the Clunkers program would have to be reduced by at least this amount. Again, I am not going to do that analysis for you, or even consider the $2.8 billion spent to generate whatever benefits they are claiming, just that Bastiat reminds us to remember the unseen.

Seriously people, this is what we are doing and calling it economic progress:

What else was unseen from the Clunkers program? Well, it’s that the destruction of those “Clunkers” actually leads to adverse effects in the used car markets. Again, nowhere in the stimulating studies on Clunker’s success have I seen how much damage was done to this market. What we’ve done is taken 677,875 potential used cars off the market. This raises prices in the used car markets, and makes consumers of these used cars worse off. And further, if you like the whole “multiplier idea” then you ought to be including a negative multiplier on how many fewer dollars are spent by user car dealers, and therefore how many fewer dollars are spent by the businesses they patronize … and so on. I’ve not seen that either.

And remember, all of this is ignoring the $2.8 billion “free lunch” I am assuming above. Finally, to end the year on a real high note, let’s think about one of the other claims the Clunkers supporters trot out. “Well, it might be an economically inefficient thing to do, but at least it is good for the environment.”

These folks should win the second Economic Darwin Award for two reasons. First, and less obvious, is that by shallowing out the used car market, they may be keeping even dirtier cars on the road than the ones they are destroying (it’s an empirical question). We certainly know that they will be encouraging people to be driving older, riskier cars for longer than they would have had the used car market not been destroyed. But more important, we ought to examine how much “we” spent in order to get the supposed environmental benefits from the program that are being claimed.

A very rough calculation would do something like this: look at how much money was spent on the program ($2.85 billion) and look at how many tons of carbon emissions are claimed to be saved because we are substituting newer, fuel efficient cars for older less fuel efficient cars (we are learning now that this, too, is an overstatement due to a thriving black market in “clunked” cars that were never “clunked”). Estimates appear that about 1.5 million metric tons of CO2 were saved by this program.

So, we spent $2.8 billion to save 1.5 million metric tons, or a cost of $1,900 spend per metric ton of CO2 saved per year. Now that seems high because the clunkers would have been on the road for more than one more year. Suppose I make the absurd assumption that they would have been on the road for 10 more years, so that we are saving 1.5 million metric tons of CO2 over the course of 10 years (and also assume that people with new, cleaner, fuel-efficient cars do not drive more), so suppose these estimates are off by a factor of 10. Then we’d be looking at spending $190 to clean up one metric ton of CO2. Is that a good idea?

No.

The consensus estimates about what the “social cost” of CO2 emissions is seems to be around $30 per metric ton per year. So let’s ask all the readers a simple question. What do you call an investment where you spent $190 and get back $30 (that’s not the original $190 PLUS $30, it is a total of $30). To put it politely, we call that a stinky idea. We’re paying at least six times as much to clean up the carbon as the damage that this carbon is supposedly causing.

Just as an example of other things we could have done – I’ve read reports from the government that ensuring every single car in America had its tires inflated properly would save nearly 11 million tons of CO2 per year! In other words, we could save 10 times the amount of CO2 for basically zero cost (it would be costly to make this happen, but not $4,200 costly!) just by making sure our tires were properly inflated. If you think the goal of government is to get us to some good outcome that markets would not seem to be able to get us to, it might be reasonable to ask why they don’t just require us to check our air pressure every other time we fill up our tanks. But that would be expecting too much from a government that is addicted to spending other people’s money, and is addicted to handing out favors to politically connected interest groups.

So let’s end this year at the Unbroken Window on that happy note! We’ve destroyed a billion and a half dollars worth of valuable cars for the sake of stimulus that never really happened. We made the lives of poor used car buyers more difficult and expensive. We’ve spent over 6 times as much to reduce carbon costs as the carbon is costing society in the first place. And people like me who raise eyebrows over such absolute nonsense are painted as the nutty, man-hating, ideologues. If this sort of stuff is not fair game, then what may I ask is? Please tell, so that I can spend the 2011 year at the Unbroken Window making sure I point out only the truly egregious stuff.

Happy New Year’s everyone. I am just hoping I can stay awake to see the ball drop.

2 Responses to “Clunk … The New Year’s Ball Has Dropped”

Wintercow, how about the “saving” of CO2 as a broken window in itself?

The question is not whether CO2 has an effect, but rather how much effect man-made CO2 has. Given that CO2 is a trace gas, it is counter-intuitive to believe the theory that changing its concentration by forty parts per million would have much impact at all.

More likely, it is just like breaking five trillion windows. That at least affect the climate indoors.